BRE Properties Eyed as Potential Takeover Candidate

The stock of BRE Properties Inc. has been a laggard among some big apartment landlords in the past year. Yet, investors are paying close attention to the company’s every move, seeking signs of whether BRE will be sold off or broken up.

BRE owns and operates more than 20,000 apartment units, most of which are located in some of the nation’s most-lucrative apartment markets, including San Francisco, Los Angeles, San Jose, Calif., and Seattle. BRE has one of the strongest balance sheets in the industry, and some analysts have estimated the company’s net operating income will continue to accelerate for several years.

But the company’s stock price has underperformed the sector. Shares of BRE, a real-estate investment trust, saw a total return of 3.88% last year. The Dow Jones Equity All REIT Index’s apartment segment climbed 7% in 2012. BRE is up 1.4% this year, compared with more than 2% for the index.

The stock has underperformed because BRE fell short of same-store annual revenue-growth expectations for 2012, in part because San Diego, its largest market, saw weaker than expected demand, said Dave Bragg, an analyst who covers the company for Zelman & Associates. BRE was also one of the last public apartment owners to install revenue-management software, which has helped peers to maximize revenue by analyzing the market and suggesting ideal rental rates for each apartment unit, he said.

While the software is now in place, this underperformance has put a “big target on BRE,” said Rod Petrik, an analyst at Stifel, Nicolaus & Co. “Sometimes this can become a self-fulfilling prophecy. You might not want to be in play, but you are.”

BRE declined to comment.

The company appears to be taking steps to make any takeover attempt more difficult. In December, BRE changed its bylaws and increased the requirement for stockholders to call a special meeting to a majority from 25% of votes, according to a securities filing, which makes it harder for shareholders to convene a special meeting. While BRE said this is was a normal part of modernizing its bylaws, the move was widely interpreted by analysts as a takeover defense.

Meanwhile Essex Property Trust Inc., another big California apartment owner, in November disclosed that it has spent $73 million for a strategic stake in a competitor. Although Essex Property Trust didn’t name the competitor, it is widely believed to be BRE. If that is the case, the stake would be small. “Most investors concluded that it was BRE, and the company didn’t dissuade anybody from that conclusion,” said Jonathan Litt, founder of hedge-fund Land and Buildings, a BRE investor that issued a note pushing for BRE to explore strategic alternatives.

Essex declined to comment.

Merger-and-acquisitions activity in the multifamily sector has been slow in recent years, but some industry watchers expect that to change in response to Lehman Brothers Holdings Inc.’s sale, disclosed in November, of Archstone Inc., one of the nation’s largest apartment owners.

Archstone was sold to rivals Equity Residential and AvalonBay Communities Inc. for $6.5 billion in cash and stock. The sale was a surprise because most investors expected Archstone to be spun off into a public company. But some analysts believe Lehman, which is liquidating the U.S. assets of the failed investment bank, missed the window of opportunity to take the company public and likely made more money by selling it.

That change in strategy likely reflects the change in apartment-market fundamentals. Apartment REITs have posted strong profits in recent years as demand for apartments has overwhelmed the supply, pushing rents higher. But some analysts believe rent increases will be smaller in the future as a wave of new apartment supply is scheduled to hit the market in the next few years. At the same time, demand could ease as a growing number of families move out of apartments and into single-family homes.

For apartment landlords, “now’s the time to take your chips off the table,” said Michael Hatchett, an attorney with Vandenberg & Feliu LLP who represents multifamily operators nationwide.

BRE, founded in 1970, formerly was known as BankAmerica Realty Investors, an affiliate of what is now Bank of America Corp. BRE became independent and changed its name in 1987. Since then, it has grown into one of the nation’s largest owners of apartment buildings with a market capitalization near $4 billion.

Mr. Litt said he estimates BRE’s value at $68 a share—well above the current $51.50 price—in part because of the company’s exposure to the valuable California market. While some markets are seeing growth slow, the “long-term NOI [net operating income] growth prospects in BRE’s West Coast markets are some of the best in the sector,” said Andrew McCulloch, an analyst with Green Street Advisors.

Also attractive to potential owners is that the company doesn’t have any significant debt maturities until 2017, and it isn’t led by any founders or family of founders likely to try to thwart a deal. Board members serve one-year terms. “With BRE being a widely rumored take-out candidate, this clean structure ups the odds of an eventual buyout,” Mr. McCulloch wrote in a note.